Richard Ney on the Role of the Specialist
If you don‘t know the name Richard Ney, you will in a moment….
Ney wrote 3 books about the true inner workings of the market as they happened about 30 years ago, and its‘ important to know that his views have of course been at odds with the people he writes about… but based on my own market experiences, I can tell you.. He was DEAD right.
In fact, I tried to do the same thing in my own book, Hedge Fund Trading Secrets Revealed ……of exposing some similar practices that still take place even in today‘s fully "transparent" markets, as well as teaching you some very effective trading strategies that you can use to profit over and over with.
But back to Mr. Ney….. Like I said, he was a market author, and like me didn‘t grow up in the business so to speak … He did however grow up in New York and earned an economics degree from Columbia, but due to few finance related job prospects in the early 1940's, he decided to audition for Broadway and landed a role in a play titled ''Life With Father'' cast as the elder son.
That role led him to Hollywood, where, with his dark good looks , was cast as Greer Garson's son, Vin, in the 1942 wartime drama ''Mrs. Miniver,'' for which Ms. Garson won an Oscar……. A year later they married and divorced in 1947.
So what the heck does a no name actor have to do with the inner workings of Wall Street? …….
Well in 1961 Ney finally put his economics degree to use and began working as a Beverly Hills investment counselor for many celebrities eventually writing a book called The Wall Street Jungle, which was on the New York Times best seller list for 11 months.
Ney, paying close attention to his clients‘ trades, figured out something was awry and doggedly campaigned to anyone who would listen, that the markets were a sham and were being manipulated to benefit insiders and specialists rather than the individual investors of those he represented.
Even though his book was on the New York Times best seller list for 11 months, the Times would not review it. ….
The Wall Street Journal refused to take an ads from New York bookstores that carried it, and he was one of only two people then, along with Ralph Nader, to be banned by NBC from appearing on The Tonight Show with Johnny Carson…………….Why?
Because In a 1965 interview with The New York Times he called the Stock Market system ''incredible mechanisms for legalized larceny'' and that "The average investor in the market is like a blind man crossing the street……….. He can't compete with professionals.''
Let‘s just say more than a few powerful people who were happy as pigs in poop doing business as usual, were extremely pissed off and made him public enemy #1…… but that did not stop him from getting the word out.
The public started to listen…. He followed up with 2 more great books..
The Wall Street Gang, and Making It in the Market.
His books were mandatory reading when I came to Wall Street so I learned a lot from him, but I‘ll let departed book reviewer Michael Templain, the source of the following information, tell you more……
R. Dorfman
“The story is told that after he had been deported to Italy, Lucky Luciano granted an interview in which he described a visit to the floor of the New York Stock Exchange. When the operations of floor specialists had been explained to him, he said, 'A terrible thing happened. I realized I'd joined the wrong mob'" (1Ney, 8).”
It was with these words that Ney began his first of three books on the nature of the New York Stock Exchange. Ney wrote at a time when a 750 Dow was high and today's volumes were beyond imagining. Some of his material is dated, and must be read in the light in which it was written.
But the main premise of his books is still true: that the specialist exists not to ensure the free and orderly trade of stock in a particular company, but to fatten himself up upon the innocence and ignorance of the small investor.
Here are some key points he uncovered…
The New York Stock Exchange is not an auction market (2Ney, 86), though many investors still hold onto that image. It is a rigged market. Volume is an effect of price. Prices are controlled absolutely by the specialists, the 'market makers' in individual stocks.
It was this discovery that led Mr. Ney to eventually give us small investors a priceless gift: enlightenment.
"Studying the transactions in each stock, I became immediately conscious that, on too many occasion to be a coincidence, a stock would advance from its morning low and then, often during the afternoon, would show an up-tick of a half-point or more on a large block of anywhere from 1,500 to 5,000 or more shares.
This transaction seemed to herald a transformation in what was taking place, for immediately thereafter the stock would begin to drop like Newton's apple. Before I could find out what caused this, another question presented itself: What caused the same thing to happen at the low point in that stock's decline? For it was also apparent that a block of stock of the same size often appeared on a down-tick of a half-point or more, after which the stock quickly rallied.
Together these two facts seemed to give a stock's pattern continuity. At the end of several days of investigation, I discovered that these transactions at the top and bottom of a stock's price pattern were for the specialist's own account. ... Clod that I was, I had at last recognized that, although the study of human nature may not be fashionable among economists, it is never out of season" (2Ney, 9).
The specialist is part of a system. First, he is part of that rare fraternity of men who are all specialists in an exchange. It is a small private club, to whose membership one can only be born.
The specialists of the Dow 30 exhibit the spirit of 'all for one, and one for all'. If one of the 30 is having problems, the other 29 wait for him, before they move onto their next agreed upon campaign (2Ney, 172). The rest of the specialists take their lead from watching the Dow 30.
But the system is more extensive and more powerful than just the specialists. The specialists are the heart of the exchange. The exchange, in turn, has practical control of the major corporations, banks, insurance companies, and brokerage houses in this country. These, in turn, influence news reporting and the regulatory agencies.
ADVANTAGES OF BEING A SPECIALIST
The specialist has many advantages, many tools to use to pry dollars from unsuspecting investors and mutual funds. Chief among these advantages is his book. In his book he can see at a glance all the buy and sell orders from the public and the funds.
His book tells him of potentially massive sales above and below his current price. This gives him a great advantage when he is trading on his own investment and omnibus accounts.
Because of his book, the specialist sees shifts in trends long before anyone else. This gives him a great advantage. The specialist will buy heavily at the bottom of a slide (at wholesale) then advance prices and sell, at heavy volume, at the peak of the rally (retail). He will then sell short and take prices down. The turning points of a rally will be marked by heavy volume in the Dow 30 (3Ney, 85-89). (note… this behavior is what partially drives our trading strategies..R. Dorfman)
When he desires he can even make large block trades without entering them into his book. In this way the public is never made aware of those trades. Should the specialist want to supply a buy or sell order from his own accounts, rather than from public orders on book, he can and will do so (1Ney, 156).
Ney cites specific examples when his customers‘ orders were ignored while the specialist completed orders for his own accounts.
When serving as the market maker, the broker's broker, the specialist trades from his Trading Account, which is to be used to service the needs of the market. However, he also has his own Investment Accounts (plural).
His Segregated Investment Accounts put him directly into competition with every other investor in his stock.
The reason for he has segregated investment accounts is that they enable him to convert regular income into long-term capital gains (1Ney, 113).
In addition, he also trades on Omnibus accounts, taking orders from a friendly bank on behalf of friends, family, and himself (1Ney, 58).
Although he is not allowed to be both long and short in his Trading account, he can take the opposite stance in his Investment or Omnibus accounts (3Ney, 130).
A Specialist will often not have any shares for a particular stock in his trading or omnibus accounts. If public demand for these shares suddenly increases, the Specialist is more than happy to supply those shares to the public by short selling.
This, of course, forces the Specialist to take the price down soon thereafter, so that he may cover his short sales at the lower price. Or, the Specialist may sell from his Investment Accounts, establishing a middle or long term high (1Ney, 61), and then take the price down.
Whichever strategy he employs, a large public demand for stock ultimately drives the price of that stock down, not up.
Distribution of large amounts of stock can be done from the specialist's trading account, usually as short sales.
The trading account can then be covered by transferring stock from the long-term investment accounts into the trading account (1Ney, 64).
The existence of the specialist's Investment and Omnibus Accounts is ultimately detrimental to the public. "In a stock with only a small capitalization or floating supply, the segregation of large blocks into long-term investment accounts for the specialist further decreases the supply of the stock available to the public" (1Ney, 61)
The specialist has absolute control over price. He can match the buys with the sells in any way he sees fit. He can raise the price of the stock 3 points in three trades, and open the next day down 5.
The seeming unpredictability of stock prices is due to the fact that prices exist at the whim of the specialist. A stock is only worth what the specialist is willing to pay for it at the moment. The fluctuations you see are, in fact, the evidence of how the specialist is working out his inventory problems to meet his short-term, intermediate-term, and long-term goals (2Ney, 172).
The specialist will sometimes 'leap frog' his prices up or down, creating a gap. This is done to keep a group of investors from buying or selling at a particular price. 'Leap Frogs' show specialist intent.
Because most investors have margin accounts, and the margin account agreement allows their brokers to lend their shares, specialists have an unlimited number of shares to borrow and sell short (1Ney, 68).
Margin agreements also allow the broker to use their customer's shares as collateral without the customer's knowledge or permission.
Margin accounts usually allow the broker to borrow any cash in the account to use for his own purposes at no interest, even to lend back to the customer for margin purchases, at interest (1Ney, 119).
At the bottom of a cycle of a stock, having panicked customers into selling, the brokers and specialist borrow the customers' money to make their own long-term purchases; using their advantageous margin to acquire large amounts of stock. At the top of the cycle the process is reversed.
Customers are paid back their money by the brokers and the specialist selling their shares to customers at a profit. The insiders even have extra cash to loan customers for margin purchases (1Ney, 136).
Another powerful tool for the specialist is the short sale. Though the specialist is responsible for 85 percent of the short selling done in a stock, the Exchanges are loathe to print any timely data on specialist short sales (2Ney, 94)(3Ney, 234). The specialist uses the short sale to control both downward and upward movements of stock (3Ney, 88).
THE CORPORATION, THE SPECIALIST, AND THE EXCHANGE
The specialists and brokers hold shares "in street name" for investors, and therefore can vote the proxies for those shares. Officers in a corporation must report to the SEC any trading they do in the shares of their own company. Yet the Specialist reports his profits in trading the shares in that same corporation to no one (1Ney, 54-55).
The specialist, one of his partners, a friendly broker, their lawyers, or their bankers, often sit on the company's board of directors, which makes the specialist privy to information before the average trader. Where an officer of a corporation is held strictly accountable to the SEC for his use of 'inside information', the specialist and fellow brokers are accountable to no one (1Ney, 54-55).
"It is an ideal situation. When you control a corporation's proxies, everyone is sympathetic to your point of view and your choice of directors. This is the other reason why nearly every major corporation listed with the Exchange (NYSE, M.T.) has a broker or a broker's banker on its board. ….It gives the exchange a pipeline to that corporation" (1Ney, 90).
Large brokerage houses, large banks, and the New York Stock exchange use dummy corporations as fronts to hold large portions of stocks in corporations. A list from any large corporation of its largest stockholders will be a roll of these very dummy corporations, who show up on list after list of major stock holders in America's largest corporations (2Ney, 19-23).
The intertwining of interests runs even deeper when the relations of Wall Street's top Law firms are examined. For example, in 1974 the New York Stock Exchange's legal counsel also represented Chase Manhattan Bank. Both entities, through their dummy corporations, were large stockholders in scores of major U.S. corporations (2Ney, 26).
THE EXCHANGE, THE SEC, THE FEDERAL RESERVE, AND THE WHITE HOUSE
"The bankers' man, Senator Carter Glass, who steered the Federal Reserve Act through Congress in 1913, had maintained that the Federal Reserve banks would be merely 'lenders of money.' The only collateral they were to accept was notes that could be paid when, in the course of business, goods and services had been manufactured and distributed.
However, almost from the day of its inception, the Federal Reserve System set about making loans on common stocks" (1Ney, 103).
Who sits on the Federal Reserve Board? ... Chief officers of banks and corporations, all of whose companies are controlled by the Exchange (1Ney, 103– 105). (Note.. this still holds true today)….
Billions, perhaps trillions of dollars worth of stocks are now held by banks as collateral for loans. This too works to the advantage of the specialists. For, to protect their interests, banks will issue stop orders to sell the stock before it falls below a certain price.
The specialist holds those stop orders in his book and therefore knows exactly where a large number of shares can be had, and at what price they can be purchased.
One quick sweep down those ranges of prices will deliver to the specialist the inventory he desires for short and mid-term purposes (1Ney, 101). (Note..this too still holds true today…even more so due to diminishing spreads)
On June 30, 1934 President Roosevelt appointed Joseph Kennedy to be the first Chairman of the SEC. Only 4 months before, Kennedy, along with Mason Day, Harry Sinclair, Elisha Walker, and others were found to be responsible for operating 'pools' that were actively manipulating stock.
When these, "poolsters withdrew and the boom collapsed the administration denounced the men who operated them" (1Ney, 215). But what's a little denouncement between friends?
The stock markets had been headed downhill since December of 1968. On May 26, 1969 a party was held at the Nixon White House. In attendance were John Mitchell, Maurice Stans, Peter Flannigan, thirty five guests from Wall Street, fourteen industrialists, seven bankers, five heads of mutual and pension funds, and two heads of insurance companies. The next day a bull rally began on Wall Street. May 27th saw the Dow Jones 30 average rise by 5 per cent in one day (2Ney, 71).
On April 17, 1971, President Nixon, who along with Attorney General Mitchell had been a Wall Street lawyer (Maurice Stans was a broker), appeared for photographs with friends from the New York Stock Exchange.
There is a revolving door between the exchange and Washington.
SEC Chairmen 'retire' to go to work for the Exchanges or major brokerage houses at many times their government salaries (2Ney, 50-63). SEC Chairman Hamer Budge was found by Senator Proxmire's investigation to be making frequent trips to Minneapolis to confer with officials of IDS. IDS was under investigation at the time by the SEC. After leaving the SEC, Budge took the position of Chairman of the Board with IDS (2Ney, 56).
Dorfman note….This cozy Wall Street/White House relationship was evident in both Bush White Houses, and is a definite factor in today‘s Obama administration…..…..…..especially because of the powerful political influence iconic investment bank Goldman Sachs has right now. Its‘ scary.
Goldman‘s sleek new building in NYC
To learn more about that, you should also read this great story by Mike Taibbi in Rolling Stone magazine ….called “The Great American Bubble Company” laying out the role Goldman has played in our past economic collapses and policies…incredible Link is here…
http://www.rollingstone.com/politics/story/29127316/the_great_americ an_bubble_machine
(You can also learn more about these cozy relationships in my book …Hedge Fund Trading Secrets Revealed.. (available on this site and bookstores everywhere))
Templain cont..
SPECIALIST STRATEGY
His goal, always, is to buy at wholesale prices and to sell at retail. This applies to his actions in the course of trading day as well as a year of trading.
At the bottom of a slide the specialist will buy heavily for his trading, investment, and omnibus accounts.
His goal then becomes to raise the price of his stock with his wholesale inventory intact. In practice, though, he may have to sell shares to meet public demand. This will cause him, then, to lower the price to re-accumulate his inventory before he can proceed to higher levels.
A rally begins while the price of the average stock is still falling. "Major rallies begin and end with the unexpected," (3Ney, 184).
To stimulate public demand for his stock, near the high the specialist will raise the angle of the rising prices dramatically for the stock.
True to one of Ney's axioms that prices beget volume, the public will rush into the market place at the rally high.
The specialist can now sell his accumulated inventory to fill the increased demand. Heavy Dow 30 volume at the high is evidence of heavy short sales by the specialists (3Ney, 113)……..When the specialist has sold all his inventory, and has sold short, he will then begin a downward slide of prices so necessary to his plans. Slides are a mirror of rallies.
Near the bottom, the specialist will increase the angle of price decline, alarming investors, scaring them into selling their shares to the specialist who needs them to cover his short sales, and to build a new inventory at wholesale.
The media will remain bullish, or cautiously optimistic throughout a slide, until the last two weeks, when they will turn suddenly bearish (3Ney, 158).
TIPS FROM RICHARD NEY:
Specialists in the most active stocks will require more time than their fellow specialists to move stocks up or down, or to cover at the top of a rally or the bottom of a slide (2Ney, 84-85).
Specialists may use a rally as a 'stalking horse' for a later rally. Price is used like a geiger counter to locate volume (3Ney, 149).
During the typical bear market, or slide, the specialists will usually bring prices up on Fridays, to keep investors hopes alive (2Ney, 92).
Leaders of the rally in the Dow 30 will often act as 'screens' for the price declines of the other 24 or 25 Dow stocks.
Each stock exhibits its own distinct pattern or rhythm of price behavior (2Ney, 189).
THINGS OF WHICH TO BE AWARE
How can you spot the nadir of each high and low? Ney says to look at volume very closely. In particular look at the volume of the individual Dow 30 Industrial stocks (2Ney, 171). Get to know these specialists' habits. Follow what they do. Patterns of behavior will emerge.
Ney was convinced that detecting Specialist short selling was a key. Specialist short selling at the peak of a rally should be detectable through increased volume.
Ney points to the gaps in prices that develop when a specialist is trying to 'catch up' with the market. These gaps, be they up or down, signal specialist intent (2Ney, 172).
"Investors assume that what happens in the economy or to the corporation in terms of earnings or sales determines the trend of stock prices. ... The most misleading element in this type of analysis is that it ignores the basic needs and motivations of the specialist system" (2Ney, 150).
We, as consumers react to certain critical numbers. Specialists know this. Specialists use the 10's (10, 20, 30, etc.) and 5's (5, 15, 25, etc.) in their strategies. They will use these numbers to elicit heavier buying or selling from the public. Often too, though, they will avoid critical numbers to avoid buying or selling stock when they do not wish to do so (2Ney, 155-156 & 163). END.
Hello….Dorfman here again….Great Stuff Right? ……
Now again it is important to note that some of Ney‘s comments here are a bit outdated… BUT, the fact remains that there is definitely still a slippery slope to climb in order to trade successfully even in today’s supposedly “transparent markets”
In fact I am going to update and elaborate on some of Ney‘s information right now………
Let me start by saying that yes in theory, the exchanges are governed by a highly moral code of financial conduct, but the mere fact that the Exchange vehemently defends the specialist system while failing to properly address the incestuous conflicts of interest operating there, it has proven one dubious fact….
Specialists don’t work for the exchange, they ARE the exchange….
and the exchange allows the specialist’s to pit his financial interests against those of his customers….. just as Ney made crystal clear.
The Exchange and even the regulatory bodies of the Federal Government have failed to properly address the basic fault in the specialist‘s game,….. namely, that the conflict of interest is built into their function.
He is meant to be both the exchanges‘ representative to the public, and at the same time he makes most of his income by trading against them.
And then whenever a specialist catches some heat for some unjust enrichment scheme, the NYSE always maintains that specialists have the right to buy and sell stocks as a regular schmo investor, just like you and me.
Ney also correctly pointed out that Dow specialists work together as a group using their power and influence as a consensus for what the whole market should be doing at any given time and trade for themselves accordingly,……even using pre- arranged signals to sucker the investing public to get in or out at the exact wrong time depending on their needs…. under their 3 Musketeer influenced motto…
All For One…And One For All.. …………. no joke.
Buckling under investor pressure, numerous Congressional Committees have half heartedly responded to consumer uproars about market losses by conducting market investigations for the benefit of the press.
But one of the reasons specialists still survive is that despite all the noise made by these investigations, the committee‘s findings have for the most part have remained unknown. hmmmmmmmmmmmm
Then, as surprising as former majority leader Tom Delay actually appearing on Dancin’ With The Stars, in April of 2005, federal prosecutors from The Southern District of New York, actually had the balls to indict 15, at the time current and former registered specialists, for federal securities violations…. alleging that over the course of nearly four years, that they were basically ‗trading ahead" of public orders, thereby benefitting themselves, causing retail investors to lose more than 19 million dollars in that one investigation alone.
The NYSE itself was even fined millions of dollars by the SEC for failing to properly monitor their trading activities.
So were they found guilty? …Some were….and fines totaling $245 million were paid… but did the public get any of their money back?.... NO.. .…and here‘s the best part…
Every charge and/or conviction against the individuals named was eventually dropped, reversed, or over-turned by various courts ,
…. meaning that basically no crimes were ever committed…. making the SDNY prosecutors‘ office an embarrassing 0-15 against the specialists, ……so for now it is still business as usual.
How They Benefit
Besides having the guilty pleasure of laughing all the way to the bank most every trading day, Specialists also have the uncanny ability to predict public investor behavior whenever "news" or earnings announcements are released.
Its ‘simply remarkable how the public is never on the right side of a trade after a news release.
This Uri Geller like mentalist, is driven by the fact that they have the ability to decide how they want investors to behave depending on the disposition of their inventory, whether they need to advance prices to dispose of inventory, or wish to lower prices in order to accumulate more.
Even I can do that when you control the game, and its players…..
Succinctly put……It is not public demand that causes rising stock prices, but rising stock prices that cause demand…… Read That Again…. The problem for most retail investors to make money in the market, is that they do not know or care how to interpret news or volume as an indicator of future price change.
Volume figures are the most important clue to specialist intentions.
Most investors believe that good news and high volume during a rally is proof of the markets‘ underlying strength, or high volume on bad news is a testament to weakness…. but in fact the very opposite is true.
As you learn more about specialist tactics, you will also learn that in the course of a major rally or decline, volume will increase as stocks move toward or just thru their "critical numbers of 10…..40, 50, 60 etc. which incite retail buying or selling because he knows investors are psychologically influenced by these round numbers to invoke some action.
A specialist can